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Bank of Montreal sees U.S. earnings growth continuing to outstrip bank as a whole

BMO announced Tuesday it was hiking its dividend by four cents to $1.
Photo: Brent Lewin/Bloomberg

Geoff Zochodne

Published: December 4, 2018 - 4:54 PM

The chief executive officer of Bank of Montreal says the lender’s future includes a rate of earnings growth in the United States that will keep outstripping that of the bank as a whole.

BMO’s forecast came after the bank reported that the contribution of U.S. businesses to its total adjusted earnings rose to 28 per cent for its fiscal 2018, which ended October 31, up from 24 per cent for the previous year.

“The U.S. segment remains a top priority, where we’ll continue to grow earnings at a faster pace than the overall bank,” said Darryl White, BMO CEO, during a conference call Tuesday morning.

Canadian banks with considerable U.S. footprints have been reaping the benefits this year of both tax reform and interest-rate hikes south of the border.

BMO is no exception. The bank reported annual results on Tuesday, with its investor presentation showing that the U.S. segment contributed approximately US$1.28 billion in adjusted earnings for its fiscal 2018, an increase of around 26 per cent from the prior year.

Overall, BMO’s profit rose two per cent to $5.45 billion for the year ended Oct. 31, which included the effects of tax reform in the U.S.

The lender noted it took a one-time, non-cash charge to net income in its 2018 of $425 million, which it said was because of the cut in the U.S. corporate tax rate affecting its deferred tax assets. However, the bank also said that U.S. tax reform boosted its annual net income by around US$100 million.

On an adjusted basis, excluding the U.S. tax hit, BMO’s profit for its 2018 was nearly $6 billion, up nine per cent from its fiscal 2017.

The bank also reported on Tuesday a profit of nearly $1.7 billion for its fourth quarter, an increase of 38 per cent from the same period last year.

BMO said its earnings for the three months ended Oct. 31 were helped by a $203-million after-tax benefit that was due to the “remeasurement” of an employee-benefit liability.

The bank’s adjusted earnings per share for the quarter were up 19 per cent, to $2.32, beating the consensus estimate of $2.30. BMO also announced it was hiking its dividend by four cents, to $1.

White said in a press release that the results were “led by strong performance in our Personal and Commercial banking businesses.”

The bank also added to its U.S. operations during the fourth quarter, as it completed its acquisition of KGS-Alpha Capital Markets, a New York-based fixed-income broker-dealer that specializes in U.S. mortgage and asset-backed securities.

BMO said the acquisition drew down its common equity tier 1 ratio, a measure of financial strength, by 22 basis points. The bank’s CET1 Ratio stood at 11.3 per cent as of the end of its fourth quarter, down from 11.4 per cent for the prior quarter.

“The investments that we’ve made this year, particularly in the U.S., position us for good earnings growth in 2019,” White said during the conference call.

Canaccord Genuity analyst Scott Chan said in a note that BMO had “delivered strong results” in its personal and commercial banking businesses in Canada and the U.S.